Question

The GAP Partnership has decided to liquidate at December 31, 2019. The capital and loan balances...

The GAP Partnership has decided to liquidate at December 31, 2019. The capital and loan balances of the partners at December 31, 2019 are provided below:
Partner
Capital Balances
Loan Balances
Profit/Loss
Sharing %
George
$210,000
$40,000 account payable
50%
Andrew
140,000
20,000 account receivable
20%
Peter
90,000
30,000 account payable
30%
· Outside liabilities are $50,000.
Liquidation expenses are estimated to be $12,000.
The Loss Absorption Potential (LAP) for the partners are as follows:

Select one:
a. George $340,000, Andrew $800,000, Peter $200,000
b. George $420,000, Andrew $700,000, Peter $300,000
c. George $400,000, Andrew $600,000, Peter $300,000
d. George $500,000, Andrew $600,000, Peter $400,000
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Answer #1

254 answers

Correct Answer is Option D George $500,000, Andrew $600,000, Peter $400,000

Working

Loss Absorption Potential = [Capital balance + Loan taken by Partnership from partner(Account payable) - Loan taken from partnership by partner (Account receivable) ]/Partner's Share in loss

George = [210,000 + 40,000] /50% = $500,000

Andrew = [140,000 - 20,000] /20% = $600,000

Peter = [90,000 + 30,000] /30% = $400,000

Loss Absorption Potential (LAP) for the partners = George $500,000, Andrew $600,000, Peter $400,000

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